Will FTX’s Role as Lender of Last Resort Affect Its Long-Term Growth?

FTX Exchange has become a lender of last resort as crypto-related firms struggle to survive liquidity crises following the recent market collapse.

Players in the blockchain ecosystem always market the cryptocurrency industry as an alternative to the traditional financial system. Others market it based on its reliance on the United States Federal Reserve. However, last month crypto investors learned the usefulness of having a lender of last resort.

The original plan was to keep crypto lenders solvent even during times of crisis. This is through using digital assets to collateralize loans. The digital assets should be more valuable than the principal of the loan. However, people often disregard these lending standards. Some lenders offer unsecured loans, while others lend out the collateral backing the loans.

Noteworthy, collateralization does not rescue a lender from a borrower that fails to meet margin calls within a market. Especially where the price of collateral dips unexpectedly. With this in mind, FTX Exchange’s Sam Bankman-Friend was keen to choose winners and losers amid the crypto bear market. Per analysts on Twitter, the move was similar to JPMorgan’s decision to rescue the traditional financial system in 1970 following the bank panic.

According to the FTX US head, the economic crisis in the crypto market is showing signs of diminishing. In an Axios Pro interview on Thursday, Sam Bankman-Fried said the number of calls from distressed businesses had reduced. He was comparing this to the first weeks of the crypto winter. Per the FTX Exchange executive, the recovery has the potential to happen remarkably fast, provided a positive economic macro-environment upholds.

FTX plays the crypto market’s Federal Reserve

With the industry weathering a bear market that has destroyed over $ 2 trillion, FTX US was the haven for most industry players. The richest cryptocurrency billionaire, Sam Bankman-Fried, bailed out two wobbling firms for almost $750 million.

The Bahamas-based cryptocurrency exchange platform gave BlockFicrypto lender a $250 million loan. The line of credit dated June 21 was only days after another bailout. FTX Exchange’s CEO, Sam Bankman-Fried, is also the owner of Alameda Research, a quant-trading firm that extended a revolving credit line to cryptocurrency broker Voyager Digital. Cryptocurrency markets approved these deals, seeing FTX tokens increase in price by 9% last month.

According to market rumors, BlockFi and Voyager Digital faced financial difficulties following halted withdrawals by crypto lenders Celsius and Babel Financial. The problem was also attributed to hedge fund Three Arrows Capital suffering forced liquidations and the expected insolvency.

Among the firms that liquidated Three Arrows’ position at a big loss when the hedge fund could not meet margin calls was BlockFi.

Citing a Twitter post by @BlockkFiZac, “BlockFi’s risk management practices and systems allow us to act decisively to mitigate risk in accordance with our contracts. These actions may include margin calls and asset liquidation when appropriate.” He added, “BlockFi can confirm that we exercised our best business judgment recently with a large client that failed to meet its obligations on an over collateralized margin loan. We fully accelerated the loan and fully liquidated or hedged all the associated collateral.”

Attempting to stem contagion

According to a report on PYMNTS.com, Bankman-Fried attempted to “stem contagion” following the $45 billion stablecoin collapse. The crumple caused financial turbulence across the entire crypto industry. The same happened with the Federal Reserve’s inflation-fighting rate hike that toppled the whole crypto market. NPR reported this on Sunday, June 19.

Citing the FTX Exchange executive, Bankman-Fried, ” FTX US has a responsibility to get involved even though doing so would see the company incur losses.”

“FTX is open to losing a little in its role as a lender of last resort. The $70 million loan made by Alameda Research to Voyager Digital was less than customer assets and could be lost. The loan was worth almost $500 million in total.”

He added that they are not the ones who caused the negativity, and having not been involved, Bankman-Fried believes that their involvement is healthy for the crypto ecosystem. This explains the billionaire’s decision to step in and help it grow and succeed.

As reported in the Financial Times, Bankman-Fried is not shaken by the potential for FTX to incur losses. The” Lender of Last Resort” insists that BlockFi’s failure would subordinate the facility to all client balances.

This is not the first time Bankman-Fried has come to the rescue of crypto. There was an incident in August 2021 when FTX gave a loan of $120 million to Liquid Group. Liquid Group is a Japanese FinTech and cryptocurrency exchange platform. The exchange was a victim of a $100 million hack, but eventually, FTX came forward to acquire Liquid Group on undisclosed terms in February 2022.

A lender of last resort

The CEO of fund manager Nickel Digital Asset Management, Anatoly Crachilov, told the Financial Times that Sam became a lender of last resort. Noteworthy, it does not mean handing out loans to everyone or disregarding their interests.

Citing Crachilov, “Apart from being among the exchanges that liquidated Three Arrows, if you have a few Lehman events at the same time, concentrated, then it could impose crypto winter for a very extended period. FTX has the balance sheet to support these businesses, and their long-term vested interest is to see this ecosystem survive.”

Bankman-Fried has his grasp set on more areas beyond crypto, coming in as a deep-pocketed savior even in politics. In May 2022, the crypto billionaire intended to spend between $100 million and $1 billion to influence the outcome of the 2024 presidential elections.

Beyond that, Sam also influences Washington D.C., where he is lobbying efforts for crypto. The FTX Exchange CEO is controlling Congress and the entire Biden administration towards creating a regulatory framework to lead crypto to its future.

Will FTX’s Role as Lender of Last Resort Affect Its Long-Term Growth?

FTX US’s pursuit of growing its array of financial offerings in the United States has advanced over the last 12 months. According to the CEO, many people (tens of thousands) are actively on the waitlist. The lender is in the market for an equities clearing company to support its acquisitions. Among those recently acquired are Embed Financial Technologies and Investors Exchange (IEX), the former’s strategic investment in the United States national stock exchange.

According to a state54.com blog post, Bankman-Friend was very vocal about the influence of the larger economy on the crypto market. He insisted on the importance of more regulatory clarity for developing the market structure. Bankman-Fried also emphasized the need for making customers and institutions comfortable within the crypto environment.

In his optimism about the proposed United States crypto regulation, the FTX Exchange CEO said, “I’m pretty excited about the bills that we have seen. […] I think that they’ll go a long way.”

In Bankman-Fried’s opinion, cryptocurrency regulation may appear similar to regulation in traditional finance. His opinion comes as the two runs on “similar-ish” principles, although crypto regulation details differ. Bankman supports that regulation is important because it empowers investors to participate in the crypto market.

The crypto winter is approaching its end, meaning FTX is due for profit. However, Bankman-Fried expressed his expectations, saying that FTX will make a profit every quarter in 2022. A paragraph from Bankman-Fried’s statement read, “FTX profits are running roughly in line with last year, and the company has gained market share over the last few months.” Nonetheless, FTX turned down the idea of integrating Bitcoin (BTC) as part of its treasury, with the CEO adding that that concept would be given thought when the Bitcoin price is at $15,000.

The future looks bright for FTX.

Bankman-Fried declared that the 2024 campaign contributions (currently more inclined towards Democrats) are unrelated to crypto. However, not many people can match his 9-figure campaign donations. Pockets this deep will often push almost anything the donor wants, making it a priority agenda.

The FTX CEO has also peddled the crypto industry publicly in other sectors, including sports. Once citing was a $135 million pay to feature FTX’s name on the NBA’s Miami Heat arena. The billionaire also plunked down $6.5 million to feature “FTX” in a Super Bowl commercial.

More interestingly, FTX has stood out among counterpart advertisers like Coinbase and Crypto.com, who announced scary employee terminations this year.